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Archive for September, 2013

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Posted On 30  Sep  2013  

Consultants branded “a waste of space”

This might seem like a sensational headline but Chris Newlands in the Ftfm section today (Monday Sept 30, 2013) says that pension funds and other large investors are throwing away billions of dollars a year on worthless advice from investment consultants. A University of Oxford study found that funds recommended by consultants do no better than others (meaning that others are not very good either at making recommendations!) and by some measure underperform the wider market significantly (meaning benchmark indices such as S&P 5000, DAX, FTSE100, N225 etc.). The research was based on the analysis of 28 consultancies accounting for more than 90 per cent of the market. The FTfm piece says that directors use consultants to cover their backsides and not necessarily to deliver performance. Aon Hewit says that they do add value, but add that “…by definition the average active equity manager will underperform their benchmark after costs.”

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Posted On 29  Sep  2013  

UN Panel’s 30-year climate warning

The world has about 30 years left before temperatures rise to risky levels according to report in the FT dated Sept 28. The IPCC report says that 500 gigatons of CO2 has been released into the atmosphere since the beginning of the industrial age and at 800 gigatons global temperatures will rise on average by 2C, causing sea levels to rise and creating much more uncertain and violent climate related outcomes. The last IPCC report was produced in 2007 and how has humanity addressed issues related to Climate Change? The story, so far is not impressive. Here is our take on the developments so far: Bodies such as the UN are terribly inefficient to bring about change. We see that in resolutions of conflicts. The UN is more efficient in bringing about humanitarian aid to victims of natural disasters and sometimes victims of war. We can see the inefficiency in

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Posted On 17  Sep  2013  

Algoam Sustainable Dividend Strategies

In an environment of persistent low rates, investors have been willing to take more and more risk by piling into Junk Bonds and Property or other cash generating assets. For many citizens having a steady income can be even more important than having capital growth. Just focusing on yield without proper analysis of the risks one is taking to earn that yield is not a wise investment strategy. In the ideal equity investment portfolio, dividend income should be balanced with growth and quality. History has lessons for us when we run simply after the highest dividend paying stocks without paying attention to the stability of the balance sheet. Prior to the crisis of 2008, Financial Stocks had very high dividend yields! At Algoam we have among the best financial models for measuring the financial health of companies. We have looked at almost all of the published balance sheet data as well

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Posted On 16  Sep  2013  

The lessons from Lehman: “Manage your risks”

Veterans of the financial industry teach us to think long term because their long term successes have been enormous. Warren Buffett is successful not only because he is a very good investor, but because he has been able to accumulate tonnes of money which can sit in different pots. In times of market stress he can simply pile in new cash into new investments or the markets as a whole. With his balance sheet and reputation he can also quickly raise new cash even at the worst of times. He and others in his position can afford to preach that sticking it out is the best policy. “Don’t Panic” according to FT Journalist Michael Mackenzie is a lesson from the Lehman crisis. For the vast majority of investors, their savings is all they have and when they lose it in the stock markets it can take years to build up

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Posted On 09  Sep  2013  

Why is smart beta a better way to invest?

The proponents of Modern Portfolio Theory have faith that the market delivers the best risk adjusted returns. This is because, they say, that markets are efficient and that it is impossible to pick winners. Judging from the performance of most active managers and traders who fail to beat market indices this is an easy way to entice investors into so called passive funds. Given the evidence that fund managers such as Vanguard and BlackRock have grown so big providing efficient low-cost access to markets one can see that there are many converts. The global financial system is poorer and more risky as a consequence. In recent months there has been an influx of smart beta ETFs and more ready acceptance of these strategies by established interests. Smart ways of investing is bound to attract more and more capital because remaining invested in the markets is akin to “becoming sick from

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Posted On 03  Sep  2013  

What is the true value of stocks?

The biggest mistake traders make is that they start to believe in their own success and the observations and reasoning powers that has led to their positive outcomes. After executing many successful trades they often end up losing it all on one or two costly mistakes. Individually as well as collectively society pays the price of self deception as we have seen in the collapse of Lehman Brothers and the absorption of investment banks such as Merrill Lynch by BoA. Usually the problem is too much reliance on history in a world that is changing in very dramatic ways. Financial markets can leave one stranded and take turns in unexpected ways and rather quickly at that. Some form of trend following run in the blood stream of humanity. We assume that our tomorrows will be the same as out yesterdays and we almost always look at history to guide us.

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Posted On 02  Sep  2013  

Italy pioneers high frequency trading tax

It is heartening to see Italy pioneering change (Phillip Stafford, FT, Sept 2, 2013: Italy to pioneer super fast trading tax). One can understand the introduction of tax on HFT as HFT is a technology driven “front running” of the retail investor in public markets and should not be allowed. The consequence of having such a tilted playing field in public markets will see the continued withdrawal of the retail investors as they realize that they will not win against the high speed super expensive and super fast computers deployed by hedge funds and trading desks. One must remember that transaction taxes have several goals for the authorities: Generating extra revenues Reducing excessive destabilizing speculation in the markets Protecting the public interest For reducing risks overall and protecting the public interest HFT should be controlled by putting in place order execution delays. Ideally this should be implements across all markets

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Posted On 01  Sep  2013  

The misuse of acronyms does damage to your investment portfolio

RRIC, BRICS, PIG, PIGS and now PIIGS and BIITS! Whatever next? It is convenient to classify countries into blocks to sell thematic stories (John Authers FT, Sept 1, 2013, Piigs in Biits as markets suffer acronym anxiety). Reality isn’t so simple. The dynamics of nations differ substantially despite the fact that the US economy predominates when it come to foreign portfolio flows as well foreign direct investments. Domestic politics and policy as well as geopolitics and the inherent strengths of countries and the balance between export led growth verses domestic growth impacts the path of development. Still from time to time, the greater influence of US events can for a short period sweep through markets, as may be caused by the often talked about tapering by the Fed. John Authers intelligently recognizes and highlights many of these differences and influencing factors for countries. Watching Bloomberg and CNBC one hears constant talk